According to the U.S. Court of Appeals for the Fifth Circuit, the entities and individuals that took part in a disallowed tax avoidance scheme did not prove the reliance necessary under securities laws to hold Proskauer Rose LLP liable as a secondary actor. In Affco Investments 2001 LLC v. Proskauer Rose L.L.P, Affco LLC, Affco Investments 2001 LLC, Lewis W. Powers, Kenneth Keeling, John H. Powers, Lewis W. Powers, Shannon Ellis, Albert Gunther III, Heidi Gunther, Gretchen Linquest, and Eric Linquest claimed that they decided to take part in a tax avoidance scam solicited them by accounting firm KPMG LLP under the alleged guise that national law firms had approved the strategy.
Soon after, the IRS began giving out notices of transactions that it considered prohibited. The plaintiffs then looked to Proskauer Rose for legal advice. The law firm allegedly told them that they did not have to disclose that they were taking part in the scheme, which involved the sale and purchase of options that were roughly identical, and that the transactions were not substantially too much like the ones that were prohibited.
In 2001, the plaintiffs reported their losses from the scam on their 2001 returns without disclosing that they were taking part in the scheme. After an IRS probe, however, they ended up paying millions in back taxes, penalties, and interests. They also did not get the amnesty that was awarded to those who revealed that they had taken part in the scam.
The plaintiffs filed a securities lawsuit that made claims under Texas law, the 1934 Securities Exchange Act, and the Racketeer Influenced and Corrupt Organizations Act against the 17 entities (including Proskauer) purportedly involved in the schemes. While the other defendants have settled, Proskauer filed a motion to dismiss.
The district court dismissed the case against Proskauer and said that the Private Securities Litigation Reform Act of 1995 does not allow “civil RICO actions based on predicate acts of securities fraud.” Now the appeals court has determined that the district court acted correctly when it dismissed the securities case. The court noted that “[w]ithout direct attribution to Proskauer of its role in the tax scheme, reliance on Proskauer’s participation in the scheme is too indirect for liability.”
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Read the 5th Circuit’s Opinion (PDF)